Indian equity benchmarks showed resilience on Wednesday, trimming earlier losses after the Reserve Bank of India (RBI) announced a 25-basis point increase in its benchmark repo rate. The rate, at which the RBI lends to commercial banks, now stands at 5.5%, marking the first hike in nearly four years.
Initially, the 30-share BSE Sensex pack dropped, but recovered from its day's low of 72,520.73 to close down 187.54 points (0.26%) at 72,880.27. Similarly, the broader NSE Nifty index rebounded from 22,578.25, ending down 91.55 points (0.40%) at 22,684.15.
Monetary Policy Shift and Inflation Concerns
Ajit Mishra, SVP (Research) at Religare Broking, highlighted that while the 25-bps repo rate hike was largely anticipated, the shift to a 'calibrated tightening' stance is the more significant takeaway. "This indicates that inflation risks are now taking greater precedence," Mishra stated. He pointed to factors such as August CPI at 4.82%, elevated crude prices, and weather-related risks as narrowing the room for accommodative policy.
Despite the tightening, Mishra noted that the Q1 FY27 GDP growth of 7.8% suggests the Indian economy is robust enough to absorb a modest tightening of financial conditions. He expects a selective market impact, with rate-sensitive sectors potentially facing pressure, while banks with stronger balance sheets and liability franchises may fare relatively better.
Analyst Outlook: Growth vs. Inflation
Kranthi Bathini, Equity Strategist at WealthMills Securities, echoed the sentiment that markets had already factored in the 25-bps rate hike. "Following the RBI's commentary on growth prospects and the growth outlook, the markets have shown some recovery," Bathini observed. However, he cautioned that crude oil prices will remain a crucial factor for market performance in the coming weeks.
Ravi Singh, Chief Research Officer at Master Capital Services, interpreted the RBI's decision and shift to calibrated tightening as a signal of stronger growth confidence, even amidst persistent inflation concerns. "The policy is mildly challenging for equities in the short term, though stronger GDP growth and investment prospects could support earnings and sentiment over three to six months," Singh concluded, offering a more optimistic medium-term view.
The RBI's move signals a new phase in India's monetary policy cycle, balancing economic growth with the imperative to control inflation.